How to Raise a Seed Round: Three Basic Tips for Founders

by Scott Edward Walker on November 26th, 2017

Despite all the hype in the press (including with respect to the latest ICO craze), raising initial funds for your startup is tough* – particularly if you’re not located in San Francisco or Silicon Valley.  Accordingly, I thought it would be helpful to provide some basic fundraising advice to first-time founders based upon my 20+ years of legal experience.

Tip #1: Get Warm Referrals to “A” Investors

The goal for every startup seeking funding is to find superstar investors (“A” investors – as opposed to “B” or “C”) who can add substantial value via their domain expertise, their contacts and/or their experience.  Simply put, some money is more valuable than other money; for example, Sam Altman’s money is more valuable than your dentist’s.

The hard part, of course, is getting in front of “A” investors to pitch your startup.  Emailing or cold-calling them generally doesn’t work.  Instead, you typically need a “warm referral” (or introduction) from someone they respect and trust — preferably a successful founder whom they have backed.  Marc Andreessen discussed this issue at the 2016 Startup School:

The argument in favor of the warm referral is that it’s the first test – it’s the first test of the ability to basically network your way to the investor. The way the investor thinks about it is that, if you can’t figure out your way to network your way to [an investor],… then you’re unlikely to be able to network your way into hiring a great team, or network your way into selling your product to customers. (at 7:33)

As Jason Freedman so aptly put it, “Investors don’t want to meet you.  They want to be introduced to you.”

Tip #2: Hustle and Build Your Network

So how do you get warm referrals to “A” investors?  In a word: hustle.  Yes, you have to hustle, hustle, hustle – you have to put in the time and energy — to build a network of friends, colleagues, founders and others who can make these introductions.  From a practical perspective, this means getting actively involved in your local tech community, regularly attending industry events and conferences, writing blog posts/articles, integrating yourself into communities on social networks and, of course, doing outstanding work as an employee (to develop a great reputation).

Once you’ve done the hard part to build a network, you now need to do your homework (i.e., do some research) and come-up with a list of superstar investors who would be the right fit for your startup based on their space/industry focus, their investment criteria, their geographic focus, their “sweet spot” and their track record.  Obviously, if you’re launching an enterprise software startup, for example, there is no point in approaching an investor who is focused on the healthcare space.

Once you’ve come-up with a list of investors, now is the time to reach-out to your network for a warm introduction in order to set-up a meeting (e.g., a cup of coffee).  The goal is to get one of these investors to be your “lead” or “anchor” (the one putting in the most money), who will take ownership of the deal and be there during thick and thin.  In fact, in this new fundraising environment (with syndicates on AngelList, etc.), your lead may be able to make the deal happen very quickly.  Moreover, once you land a high-profile investor, it makes it a lot easier to land other investors because the most common investor question is always: “who else is in?”

I briefly discuss this issue in this clip below from a legal workshop I conducted a couple of years ago in San Francisco:

Tip #3: Create a Competitive Environment

As you begin to set-up investor meetings, the challenge now is to create a competitive environment and a sense of urgency.  Indeed, this is critical in order to effectively negotiate any transaction (including a financing) – as every investment banker on Wall Street understands.  As Paul Graham writes:

With both investors and acquirers, the only leverage you have is competition. If an investor knows you have other investors lined up, he’ll be a lot more eager to close — and not just because he’ll worry about losing the deal, but because if other investors are interested, you must be worth investing in. It’s the same with acquisitions. No one wants to buy you till someone else wants to buy you, and then everyone wants to buy you.  

Accordingly, the goal is to get several term sheets and to play investors off of each other to negotiate the best possible structure and terms (or, better yet, have your lawyer draft the term sheet and control the drafting).  For example, one investor may propose Series Seed Preferred Stock and another investor may agree to a SAFE; or, in a larger financing, one investor may be pushing hard for participating preferred and a 25% option pool and another investor may agree to the same valuation, but straight preferred and a smaller pool.  As Travis Kalanick advises (in my favorite post on fundraising):

The second you have a single term sheet, you need to move very quickly to get a second one. You don’t have a lot of time, because momentum at this point is crucial to closing and your first lead does not want to feel like he’s being dicked around. Your second term sheet will be easier to get than your first, but it will make a HUGE impact on your deal. Without a second term sheet, you will be in a position to take whatever crappy terms the original lead provided, and it’s quite possible that the terms could get worse (or even go away!) as the one term sheet deal drags out.


To effectively raise a seed round for future growth and success, you must (i) hustle and build a strong network, (ii) get warm introductions to “A” investors and (iii) create a competitive environment and a sense of urgency.  One quick caveat: if you’re able to get accepted to a top-notch accelerator (such as Y Combinator), they will do a lot of the hard work for you – i.e., they will introduce you to “A” investors (including at Demo Day) and they will teach you how to pitch and close deals.  Good luck!  Cheers, Scott


*Addendum:  On December 1st (five days after this post), Fred Wilson confirmed the difficulty of raising seed funds in his post “The Early Stage Slump” and specifically noted that:

For entrepreneurs just starting out, it will be tougher to raise your first rounds. That is how it always has been so it is a return to normal. It is not great news, but it is the reality. If you price your seed round appropriately and have a good team and plan, you can raise money. But it will be harder.

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